KPMG: New liquidity requirements may cause drop in bank profits
March, 11th 2011
A new report from KPMG International finds new regulations related to bank capital and liquidity requirements could strengthen banks resiliency, but enhanced liquidity requirements may cause a systemic reduction in banking profits, and the entire sector might be fundamentally reshaped.
The KPMG report highlights that new liquidity buffers that are potentially three times their current size will increase the costs of liquidity sharply and may permanently depress margins. Liquid funds may have to be held in low-risk, low-return assets such as government bonds, yielding small returns and further affecting profits. The cost of attracting long-dated retail deposits is a key business challenge over the next few years.
The report contains a Regulatory Pressure Index, that strives to capture the challenges banks face over the next two years worldwide.
It shows that, overall, European and U.S. banks face the greatest challenges, while banks in the Asia Pacific less so . Commentators in the Asia Pacific attribute the relatively lower pressure in that region to the changes that have already been made in the wake of the Asian banking crisis of 1999.
Linda Gallagher, national leader of KPMG LLPs Financial Services Regulatory practice commented on the situation:
Banks that plan and prepare early for these new regulations, embedding new requirements in how they govern and direct the business, while also refining and changing their business models will be the best positioned for success.
KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International Cooperative (KPMG International). KPMG Internationals member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries.